Lending institutions are coming under fire for their continued antics with regard to the bail out money that we are giving them. You realize that if you and I were in the position of needing money for some sort of bail out, we’d be laughed out the door.
I don’t believe many business owners are aware of certain business practices being allowed, or should I say going undetected, under the Department of Corporation’s lender licensing provisions within the State of California. This egregious and appalling practice of what you could call predatory lending schemes, is being successfully deployed within the State without any apparent oversight from the Department of Corporations. Sub-debt and origination lending by unscrupulous “loan to own” schemes are operating successfully.
Their goal of business ownership is facilitated under the pretense of being “lenders”. They operate both as sub-debt and origination lenders. Their target is typically a small business owner that has demonstrated a historically profitable and successful company and has a reasonably good personal net worth but is having a financial problem for one reason or another.
They sell themselves as experienced lenders that understand the world of finance and are willing to help the business owner with his problem. Unfortunately the process ends up with the business owner losing everything including his or her personal assets while the lender takes all.
While the take-over scheme is somewhat different in each case, there are several commonalties in the approach. For example, you might hear:
Don’t worry, we are professional lenders and know how to level the playing field with your senior bank.
Don’t worry about the high interest rate (>20%). This is a temporary bridge loan and we will get you into conventional financing as soon as possible.
We don’t have Federal Regulations to worry about and we can be very flexible and patient with the loan.
Along with the high interest rate our investors require that you guarantee the loan. Don’t worry it’s just a formality we need to go through.
To do this deal we will also need an equity kicker in the form of warrants.
Take our word for it; we have it on good authority that if you don’t do this deal with us your senior bank will foreclose on all of your assets.
Sound familiar? The loan is constructed and implemented in such a way that failure to repay is almost a forgone conclusion. Predictably, once the first line of credit is utilized, they offer additional money with extended personal guarantees and an increase in the equity kickers. Very quickly the business owner finds himself in front of a lender whose promise of help and patience and financial assistance was nothing more than an attempt to acquire the assets of the business at a steep discount.
Once the business owner finally realizes what has happened and what the true goal of the supposed lender is, it is generally too late. In one case the business owner decided to go into bankruptcy, however, the lender was able to overwhelm the bankruptcy counsel with very expensive litigation. In the end, the lender forms a new company, and makes sure that their claims for interest and principal along with staggering legal bills are ahead of all other creditors.
They then take the business over as “newco” leaving all other creditors and the business owner with nothing. Their connections within banking institutions help them find a way to purchase the senior loans of a business at a significant discount while maintaining the full value of the loan via the personal guarantees.
This association with banks provides this type of lender with information needed to zero in on a victim. In one case a $2 million dollar loan for a business owner turned into a nightmare of litigation and bankruptcy at the cost of his home, his business and his wife’s business. Once the new lender has acquired all the assets of the business owner he now has both the business and all the owners’ personal property (home, cash, autos, etc.) He then begins to run the business for his investors.
This loan to own scam has many other working parts used by the disguised lender in accomplishing its goals. There are several companies and their owners who have been victimized by one such scammer operating with a lenders license issued by the State of California. This lender now owns or is currently attempting to own these companies.
If anything in this column sounds familiar, it’s time that these types of lenders are exposed. It’s time that real change takes place throughout the lending community. Banks need to recognize the results of selling off loans to these types of lenders. It’s time to stop predatory lenders and the attorneys that protect them.
Email me with your comments on this and other issues at: lkoelling@fostercity.org.
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